Boston banker's 'feeling' -- interest to ease more

ByDavid R. FrancisSeptember 22, 1981

Boston
— Richard D. Hill, chairman of the First National Boston Corporation, has a "feeling" that should delight millions. He feels that interest rates will come down further soon.

First National Bank of Boston, the corporation's bank subsidiary, joined the rush to reduce its prime rate from 20.5 percent to 20 percent Sept. 15. Mr. hill expects a "slow and gradual downward trend in rates" to bring the prime rate charged the bank's most creditworthy customers to the 15 to 17 percent level by the first quarter of 1982.

One reason for this expectation is a dropoff in loan demand. "Up to a couple of weeks ago, demand was staying extremely high," the chief executive of New England's largest bank noted in an interview. "Indeed, it stayed high all summer when we normally expect it to dip. . . . It almost reached a new high every two weeks."

Hill figures the credit demand was somewhat "artificial," since many companies were avoiding the long-term bond market because of its higher interest rates. Rather, companies were meeting their maney needs in the commercial paper market or through bank loans.

"The minute [companies] get any daylight in interest rates in the long-term area or begin to believe long-term rates aren't going to decline very much, then they will begin to go to the bond market and shift the credit demand from the short-term sector to the long-term sector," he said.

Today's high interest rates have already hit the housing and auto industries hard. Other industries had until now adapted relatively well to the high interest rates, Hill said. "They had been passing them [high interest costs] on to customers."

Companies are now finding more price resistance from their customers, however , along with stiff competition, and profits are starting to suffer.

"We are beginning to see it now in a lot of our middle-market borrowers and smaller business borrowers, who have been getting along pretty well in this whole high-rate era. We are now reaching the point where the strains are pretty great.One has to be concerned about the possibility of higher loan losses in the banking industry generally."

That's not the case for the banks' own profits, though. Hill said banks have been enjoying larger profit margins, offsetting to some extent the slim margins earlier this year. "There is a very proper tendency to hang onto margins," he said. "The direct relationship between our yields and loans and our cost of funds is now getting back to normal."

The Reagan administration, of course, has not been happy with the inclination of what it calls "Wall Street" -- meaning the financial community -- to hang on to high interest rates. But it will undoubtedly be pleased if Hill's "feeling" about interest rates coming down proves accurate.

Mr. Hill commented: "We are coming toward an election year -- 1982. There is a very strong desire of the Republicans to get control of the House and to strengthen their control of the Senate. The interest rate thing now has begun to reach very important political proportions, much more than it had in the past. High interest rates are really beginning to bite."

Thus Hill is expecting the Federal Reserve System to come under "immense pressures" to allow interest rates to slowly decline. The bank chairman sees the Fed as possibly permitting such a trend because the growth of one key measure of the money supply, M-1B, has been running below the target announced by the Fed. Moreover, the rate of inflation has been declining, despite an upward blip in July. And credit demand, both long and short term, is "not exceptionally strong."

"Whether this is the correct thing to do is somewhat beyond the intelligence of man to decide," he says.

In any case, should credit demand increase this fall, as it often does during that season, the Fed has "some room to maneuver," Hill adds. "They will be able to deal with it without forcing interest rates up further, because they have build up this reserve by holding down the [monetary] aggregates."

Hill does approve of the restraint the White House has shown in jockeying for lower interest rates. Usually, he recalls, most administration have been putting pressure on the Fed for lower interest rates much earlier in the business cycle.

Looking at the federal budget, he calls for some further cuts in spending -- including more than the $13 billion trim in defense spending called for by President Reagan.

He says there should be a greater effort by the administration and Congress "to balance a little more the cuts that are being made in the nondefense area with cuts in the defense area. Their targets for achieving goals should be stretched out a little further."

He agrees, however, with the thesis that in the past defense needs have been ignored in favor of "entitlement programs," that is, civilian social programs.

Hill criticizes "Wall Street" for being a "slave to the economists who are picking budget figures out of the air for 1982, 1983, 1984." At this stage, nobody really knows what the deficits will be, he says. Nobody knows whether the economy will be weak or strong, or what the real level of spending will be.

"No one in terms of forecasting the budget for 1982 and subsequent years in paying any attention to the theory that a reduction in both personal and corporate taxes will result in an increase in GNP." Supply-side economists maintain that such cuts will encourage investment, producing more jobs and more tax revenues.

Mr. Hill advocates giving this supply-side theory a chance to work. It is "kind of unfair" of critics to charge so early in the game that deficits will be huge. Besides, he says, such deficits need not create greater inflation unless financed by the creation of new money by the central bank.

This is a common thesis of businessmen, that the Reagan program should be given more time to take effect.